Recent analysis published in The Telegraph indicates that young workers who are saving hard for their pensions could end up exceeding the lifetime allowance and paying a much higher rate of tax.
According to the calculations, savers from middle-class families with more than £20,000 in pensions per annum could land in a tax system that was initially made to target the most well-off 
people. White collar employees, including accountants and teachers, who are aged 35 years could exceed the lifetime allowance – that is, if they continue to make contributions to their pension for the next 25 years.
A representative of Barnett Waddingham, pensions consultants, commented:
“The lifetime cap is not just an unnecessary limit it actually penalises those who have started their pension saving young and built up their pension pots through regular savings, have invested wisely and have received good investment returns for their efforts.”
Malcolm McLean added that in return for this financial planning, the government will tax them at 55%, which sends out the wrong message to young savers. The lifetime cap was introduced in 2006, with people permitted to build a pension pot of up to £1.25m without being penalised. In 2011, the total amount had been £1.8m and was cut to £1.5m, which was reduced to its current amount in April 2014. If the current limit is frozen, it would be worth just £761,914 in today’s money, according to Zurich’s calculations. That would provide an annual pension of just £19,810 per year. Analysts believe that reducing the lifetime limit will just discourage savers.
Could you receive a 55% tax bill?
Tax is charged on private pension savings that exceed the lifetime allowance. Currently, this is £1.25m. Although most people won’t be affected by the lifetime allowance, it is estimated that 360,000 pension savers will be affected by the reduced allowance. It is possible to have lifetime allowance protection in place, which means that you won’t be affected by the reduction.
If you are unsure how much of your lifetime allowance you have used, contact your pension provider to ask for details. If you have more than one private pension, you will need to do this for them all and add them up.
Find more help and support for your London-based business in our information centre.